The Fisher Investments On series is designed to provide individual investors, students, and aspiring investment professionals the tools necessary to understand and analyze investment opportunities, primarily for investing in global stocks.
Within the framework of a top-down investment (discussed more in Chapter 5), each guide is an easily accessible primer to economic sectors, regions, or other components of the global stock market. While this guide is specifically on emerging markets, the basic investment methodology is applicable for analyzing any region or even global sector, regardless of the current macroeconomic environment.
Why a top-down method? Vast evidence shows high-level, or macro, investment decisions are ultimately more important portfolio performance drivers than individual stocks. In other words, before picking stocks, investors can benefit greatly by first deciding if stocks are the best investment relative to other assets (like bonds or cash), and then choosing categories of stocks most likely to perform best on a forward-looking basis.
For example, a Technology sector stock picker in 1998 and 1999 probably saw his picks soar as investors cheered the so-called "New Economy." However, from 2000 to 2002, he probably lost his shirt. Was he just smarter in 1998 and 1999? Did his analysis turn bad somehow? Unlikely. What mattered most was stocks in general (and especially US technology stocks) did great in the late 1990s and poorly entering the new century. In other words, a top-down perspective on the broader economy was key to navigating markets—stock picking just wasn't as important.
Fisher Investments on Emerging Markets can help guide you in making top-down investment decisions specifically for emerging markets. It shows how to determine optimal times to invest more heavily in the region, how geo-political events have shaped the investing landscape and what to watch for in the future, and how individual stocks can benefit in various environments. Though frequently lumped together, each emerging market nation has its own local drivers, opportunities, and risks. Using our framework, you should be better equipped to critically analyze the region, spot opportunities, and avoid major pitfalls.
This guide is arranged into two sections. Part 1, "Going Backward to Move Forward," starts with a discussion of exactly what an emerging market is—because definitions vary, and how you approach the region can impact how you build an emerging market allocation. But its primary focus is a brief history of several key emerging market countries. Whereas developed markets, the US in particular, have long-standing, well-developed free markets, the road to a market economy in emerging regions is still being developed and often filled with potholes. An understanding of how they got to their current market constructs is vital in understanding where they're likely to go next—and how to game that for potentially superior returns.
Part 2, "Developing an Emerging Markets Strategy," delves into a top-down investment methodology, macro-economic and regional portfolio drivers, and individual security analysis—everything you need to know to build an emerging markets portfolio allocation. You'll learn to ask important questions like: What are the most important elements to consider when analyzing emerging markets—together and individually? What makes an emerging market stock different from its developed world peer? What are the greatest risks and red flags? This book gives you a step-by-step process to help differentiate countries and stocks so you can identify those with the greatest probability of outperforming. We'll also discuss a few investment strategies to help determine when and how to overweight specific nations or even sectors within the region.
Note: We've specifically kept the strategies presented here at a high level so you can return to the book for guidance no matter the market conditions. But we also can't possibly address every market scenario and how markets may change over time. And many additional considerations should be taken into account when crafting a portfolio strategy, including your own investment goals, your time horizon, and other factors unique to you. Therefore, you shouldn't rely solely on the strategies and pointers addressed here, because they won't always apply. Rather, this book is intended to provide general guidance and help you to begin thinking critically not only about emerging markets, but also investing in general.
Further, Fisher Investments on Emerging Markets won't give you a silver bullet for always picking the best stocks. The fact is, the right emerging markets stocks will be different in different climates and situations. Instead, this guide provides a framework for understanding the region so you can be dynamic and find information the market hasn't yet priced in. There won't be any stock recommendations, target prices, or even a suggestion whether now is a good time to be invested in a particular region. The goal is to provide you with tools to make these decisions for yourself, now and in the future. Ultimately, our aim is to give you the framework for repeated, successful investing. Enjoy.